Sample Finance Paper on Foreign Direct Investment

Foreign Direct Investment

A Foreign Direct Investment (FDI) is a tactic which involves establishing an abroad physical presence by obtaining productive assets like labour, equipment, capital, plant, land and technology. FDIs are of several types which include mergers and acquisitions, integrations and joint ventures. Some of the aims of FDIs include obtaining access to other markets, accessing knowledge and raw materials, avoiding trade barriers, reducing production costs, among others (Asongu et al., 2018). Volkswagen is an example of an FDI which spent one billion dollars on building a factory for manufacturing delivery vans in Poland. Denmark`s Lego Group invested in China by building a factory worth over 100 million Euros in the region.

FDI`s scope and nature depend highly on technological, educational, transportations and communications infrastructure. These four factors play a big role in attracting investors to a region—for example, the technological factor. In the modern business world, technology is critical in giving companies a competitive advantage (Asongu et al., 2018). This advantage is achieved by making operations fast, easy, and less costly and quality finished products. For this reason, companies which are seeking to invest abroad will go to those areas where technology is highly advanced. For instance, many companies are targeting Japan due to its constant advancement in technology. Undoubtedly, Japan leads in technology and innovations, especially through automation, robots and artificial intelligence.

Transportation infrastructure is another crucial factor in FDIs. Businesses need a good transport system to easily move raw materials as well as finished products with ease and fast. Firms will invest in regions where the transport system is well developed as this will eliminate the chances of inconveniences brought about by delays. For example, China attracts foreign investments because of effective transportation, especially in its subways, Maglev trains and light rail (Asongu et al., 2018). Additionally, China is a popular investment destination due to its high growth rate, lower labour costs and size. Volkswagen and General Motors are examples of US firms that have invested in China.

Communications systems are crucial for maintaining connections with the business and its customers as well as among employees. As such, the nature of FDI`s highly depends on the effectiveness of a region`s communication systems (Ly et al., 2018). Advanced economies like the US, Netherlands, Japan, China, Australia and Canada are popular targets for FDI because of their superiority in communications like telephone systems. For example, Walmart, which is a US company, has directly invested in China with over 240 stores and thousands of workers. Communication flow is needed in these stores as well as among employees, and as a result, China and its effective communication system was attractive for Walmart.

The educational factor is all about learning and gaining knowledge. The modern business world requires knowledge in all its operations: educated managers and educated employees with the necessary knowledge and skills. In any organization, regardless of the size, human resources are the most important as they control and drive all other resources (Ly et al., 2018). Firms engaging in FDI will, therefore, target regions with a talented and educated workforce. For example, India is preferred because it has a workforce which is properly educated, and management is highly talented. For example, Axis Bank is a Singapore company which has invested in India. On top of its managerial talent, India is attractive to investors because of the low cost of labour.

FDI`s nature and scope will always be dependent on advanced technology, infrastructure, communications and transport as these four factors play a big role in achieving a competitive edge.

References

Asongu, S., Akpan, U. S., & Isihak, S. R. (2018). Determinants of foreign direct investment in fast-growing economies: evidence from the BRICS and MINT countries. Financial Innovation, 4(1), 26.

Ly, A., Esperança, J., & Davcik, N. S. (2018). What drives foreign direct investment: The role of language, geographical distance, information flows and technological similarity. Journal of Business Research, 88, 111-122.